All across the globe organizations of all types use outsourcing to get work done. In fact, the global outsourcing market is approximately $90 billion per year. Companies outsource everything from rote data processing tasks to highly strategic tasks such as marketing strategy – and everything in between!
But digging a little deeper will reveal a lot of failures, too: companies that spent time and money outsourcing projects, only to get little or no results in return. So, how do you decide whether to outsource a project or not? Let’s dive in…
What Are The Pros And Cons Of Outsourcing?
As with any business decision, there are pros and cons to outsourcing. In some cases outsourcing can save money and time, while in other cases it can be a costly failure. Before we drill down into making a decision for your specific project, here’s a quick comparison of the pros and cons of outsourcing vs insourcing (hiring employees):
- Cost: If you’re outsourcing offshore, the price tag on the project is likely to be a lot cheaper. For example, a typical software engineer salary in India can be less than 25% of what a similar engineer in the US would cost. Sticker prices can be deceptive, though – communication challenges, talent differences and other factors can quickly balloon project hours, resulting in similar or higher costs. (More on that later!)
- Speed. Outsourcing is usually faster, unless you already have an in-house team hired, trained, and ready to push go.
- Agility. Going the outsourced route will give you much more agility in most areas. For example, you can scale up, scale down, or modify your team very easily. Mark agility down for the “pros” column.
- Quality. Typically you’ll get lower quality deliverables when outsourcing, although the difference may not even be noticeable in many cases. The simple fact is, rarely do outsourced teams have the same knowledge, commitment, and motivation for quality as insourced teams. Outsourced teams are often judged more on deadlines and efficiency than on quality, and that tends to be reflected in the work.
- Expertise. Outsourcing is a great way to get specialized expertise for your team, such as a professional with expertise in a specific software system or challenge you’re facing.
- Internal Knowledge. This is an area where insourcing will almost always win – outsourced teams won’t know your internal systems, technology, and people. This can lead to problems, challenges, inefficiency, and increased time/cost to complete the project.
- Project Scope. If your project is ongoing and un-defined in scope, you may do better to insource it. If it’s a clearly defined project, on the other hand, it’ll be easier to outsource.
Outsourcing: Onshore vs. Offshore
Before we dive further into the pros and cons of outsourcing in general, let’s take a look at the two types of outsourcing:
- Offshore outsourcing refers to outsourcing to another country (India, Philippines, and Mexico are three examples of popular choices). The main attraction to offshore outsourcing is cost: companies can save 30% or more by offshoring projects.
- Onshore outsourcing refers to outsourcing within your own country (USA, Germany, UK, or wherever you happen to be.) Costs are typically much higher, but quality and communication are typically better.
Nearshoring, which is really a sub-category of offshoring, refers to outsourcing to a country in a similar time zone. For example, US companies may outsource to South America, while UK companies may outsource to Eastern Europe. Nearshore outsourcing helps improve communication lag, but won’t necessarily help with cultural or language gaps.
6 Questions To Help You Decide Whether To Outsource Your Project Or Not
The pros and cons of outsourcing all come down to the specifics of the project you need to complete. Here are 6 questions you can use to analyze a project to identify the pros and cons of outsourcing it.
1) What expertise do you need to complete the project?
Make a list of the skills and expertise you need for this project to succeed. If you don’t have the skills in-house, that’s a point in the “pro” column for outsourcing.
Also consider how difficult it will be to recruit and onboard the talent. If you need to recruit an entire engineering team including engineers, managers, and a senior engineer with specialized knowledge, it could easily take you 6 months just to find and hire the staff.
Bottom line: Unless you already have the talent, consider outsourcing.
2) How fast do you want to move?
Is this a project you want done yesterday? If you want it done quickly and don’t already have the personnel in-house to complete it, outsourcing is almost always your best bet. While it typically takes months to hire and onboard an internal team, you can often have an outsourced team ready to start your project in days or weeks.
If you’re outsourcing the project because speed is critical, be sure to agree on deadlines with the outsourced team. Ideally, you should include incentives (positive or negative) for hitting the deadline.
For example: if a beta version with all specified features is ready for testing by January 22nd, a 10% bonus will be paid on the project. If the beta version is not ready by February 1, payment will be delayed by up to 1 month.
Bottom line: if speed is critical, consider outsourcing.
3) What internal knowledge and/or collaborations are needed?
Does the project require in-depth knowledge of your products or technical systems (such as code bases)? Does it involve working with multiple teams or departments? All of these can be challenging for an outsourced team to navigate, especially if they’re offshore. An offshore team may struggle to build the consensus they need to complete the project (or even understand the interplay between the different groups they’re dealing with). Let’s face it: office politics are difficult enough to manage, without being in a different timezone and from a different culture!
Bottom line: if significant internal knowledge is needed, consider insourcing.
4) How important is company culture to the project’s success?
Is this a core part of what makes your company what it is? If so, outsourcing can be a dangerous move – not just for the project, but for the whole company.
For example, if friendly, expert customer service is a core part of your company culture, outsourcing it is likely to lead to disaster. An outsourced team will rarely have the same culture and commitment that you can build in-house.
Bottom line: If culture is key, strongly consider insourcing.
5) What does this project interact with?
Does this project need to interact with internal systems? For example, if you need to build middleware that connects your CRM database to your local backup server, that may be more difficult to outsource.
This is especially true if the project needs to modify existing systems. Getting read-only access to internal systems is one thing. Being able to modify existing systems (while coordinating with release cycles, work being done internally, etc.) can be a big challenge for an outsourced team.
Bottom line: if the project involves modifying existing systems, consider whether it can be done easily via outsourcing or not.
6) How important is the knowledge gained during the work?
If you need to retain the knowledge gained during the project, it’s usually best to insource it. For example, if the project is technical research to determine the best way to implement new features for your products, you’ll want the researchers available 6 months from now to share their knowledge when the features are under development. A written report simply can’t share everything that’s learned.
Bottom line: if it’s critical to retain the knowledge, insource it!
A Summary Of Outsourcing Pros & Cons
The bottom line is, the pros and cons of outsourcing will vary depending on your project. Faster speed is a typical “pro” of outsourcing, while lower quality is often the “con” you have to trade. Cost and other factors will vary depending on your specific project.
Where Should We Outsource To?
As already mentioned, you’ve got two main options for outsourcing: onshore (within your country) or offshore (to another country, typically one with lower labor costs). If you decide to offshore the project, here’s a great list to get you started: this graph shows the top 10 outsourcing countries, ranked by cost, available talent/skills, and business environment: